Washington Mutual: 1 Merger Too Many?

On Wall Street, Chairman Kerry Killinger is seen as a lean, mean acquisition-making machine who built the nation's largest thrift.

On Main Street, the Seattle-based company won over customers with its hometown appeal and "people-friendly" tellers, positioning itself as an alternative to the impersonal customer service of big banks.

But as Washington Mutual puts the final touches on its $6.9-billion acquisition of Irwindale-based H.F. Ahmanson, parent of Home Savings of America, those two worlds are starting to collide.

Investors have grown impatient about Washington Mutual's slowness to bring the promised savings from the Ahmanson merger to the company's bottom line, partly because of some unforeseen expenses needed to upgrade old branches. Some analysts wonder whether this time the ambitious Killinger--who has completed 11 acquisitions worth $25 billion during the last five years--bit off more than he can chew.

Concern about higher-than-expected mortgage prepayments led several analysts recently to lower their profit expectations for Washington Mutual, and its stock, whose price has been flat this year, continues to trade more cheaply than its peers. "It's a very unloved stock," said Jay Tejera, an analyst at Ragen MacKenzie in Seattle. "The company is hitting its numbers [for cost savings], but they also are spending more in ways they didn't tell people about. Wall Street is a little disappointed that those profits are not falling to the bottom line."

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Meanwhile, consumers are striking at one of the hallmarks of Washington Mutual's success: its customer service. Branch closures--including more than 100 in Southern California in late May--have led to long lines and short tempers at some locations. In Laguna Hills, teller lines snaked out the door recently and employees urged customers to try other branches. In Manhattan Beach, full-time parking attendants are needed to direct traffic.

Friendly service? Customer Bert Gibbs says a Washington Mutual employee hung up on his wife when she asked for his name so she could complain about his attitude. And Sherman Oaks retiree Ralph Klein, a former Home Savings customer, says the thrift mistakenly rejected his monthly pension annuity check when his account converted to the new system in June, leaving him short of cash for nearly three weeks until the problem was straightened out.

"It's become a zoo," sighed a Tustin customer recently, complaining that she frequently must drive around the parking lot in search of a space. "It used to have a local feel, but this reminds me of BofA."

Is Washington Mutual becoming what it once poked fun at in its TV commercials: a giant California bank more worried about serving shareholders than customers?

Absolutely not, Killinger vows.

"We are committed to being the leader in customer service," he said. "And all the surveys we've seen support that our level of customer service is superior to the other major banks."

Killinger is credited with turning Washington Mutual from a sleepy Northwestern thrift with $20 billion in assets into a financial heavyweight with $174 billion today. He accomplished that chiefly by swallowing three California thrifts: American Savings in 1996; Great Western Bank in 1997; and Home Savings in 1998, shortly after Home had acquired Coast Federal Bank.

Though Killinger concedes that the merger has caused some minor interruptions in customer service, he said complaints and glitches from the recent Home Savings merger have been fewer than the thrift experienced in previous deals.

"Any time you come through a conversion, it puts stress on customer service," Killinger said. "But much of that is already starting to improve. . . . Overall, for a conversion of this size, customer reaction has been very positive."

So far, it's too early to know whether customers agree. Though Washington Mutual boosted its total checking accounts by 90,000, or 2%, during the first three months of the year, total checking account deposits dropped $381 million, or 3%.

The real test of whether customers are sticking with Washington Mutual will come later this year, as Southern Californians adjust to the consolidation.

"This will be a critical time," said Norman Katz, managing partner at MCS Associates, a bank consulting firm in Irvine.

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Wall Street will be watching. Though Washington Mutual has earned a reputation for deftly executing its mergers, the disastrous 1996 marriage of Wells Fargo and First Interstate is still fresh in the minds of investors. Wells Fargo's stock sank 17% after computer glitches and poor service led thousands of Wells customers to flee, costing the bank billions in deposits.

More recently, First Union, the nation's sixth-largest bank, suffered a similar fate when Chairman Edward Crutchfield--like Killinger, a Wall Street darling--was forced to admit in May that his string of acquisitions had proved more costly than anticipated. First Union's stock fell 24% before recovering slightly last month, but some analysts now say the wounded bank might be an acquisition target.

Wall Street can't help worrying that Killinger might be the next to stumble. The thrift's sagging stock price has led to similar rumors that Washington Mutual might be bought by a large bank seeking a California foothold, though Killinger said the company's board is committed to remaining independent.

Chief among the concerns is whether Killinger can deliver the $330 million in savings he promised with the Ahmanson merger.

"Meaningful realization of the benefits promised by the Ahmanson acquisition still eludes Washington Mutual eight months after closing," Charlotte Chamberlain, an analyst at Jefferies & Co., warned in a recent report. She lowered her 1999 earnings estimate to $3.30 per share from $3.40.

Though Killinger has shaved costs by slashing 3,500 jobs and shuttering 247 branches, the company is using much of the savings to upgrade branches, train employees and install new computer systems so that consolidated locations are better equipped to cope with added traffic.

The new Washington Mutual branches are handling much more business than their predecessors: Deposits have swelled to an average of $115 million, compared with $30 million per branch at other financial institutions.

"The company didn't fully appreciate the logistical challenges of operating these large branches," said Tejera, the Ragen MacKenzie analyst.

Killinger said he remains confident that the merger will yield the promised savings, even if it takes longer than some would like. He defends the company's decision to spend heavily on training and branch upgrades, saying Washington Mutual did not want to suffer the same problems Wells Fargo did in 1996.

"Now that we have completed the branch conversions, we can focus on improving efficiency," he said.

Killinger predicted that Washington Mutual's earnings will continue to break records this year and that investors should start seeing the merger savings by late 1999 and in 2000. By then, he said, the effect from the recent Southern California branch consolidation and the closure of the former Home Savings headquarters in Irwindale will be fully reflected in the company's financial statements.

Consolidation has been strongest in Southern California. Three years ago, Home Savings, Great Western, Coast Federal and American Savings together had 519 branches in Southern California, according to Sheshunoff Information Services, a Texas-based bank research company. Today, Washington Mutual has 337 branches in the same region.

Not surprisingly, Southern California is where some customers say they are beginning to feel squeezed.

Though Washington Mutual still earns high marks for its no-fee checking accounts and accessible branch managers, there are occasional gripes about ATM outages or the thrift's clumsy online banking service.

Customer irritations periodically flare up on the Yahoo stock message board for Washington Mutual, and a handful of ex-customers are so angry that they have launched Web sites criticizing the thrift.

"I felt like more of a number," said Jim Hopkins, a former Coast Federal customer whose Long Beach branch was eventually merged into Washington Mutual. "The lines got much longer." After some of his favorite tellers lost their jobs, Hopkins says, he moved his account to a credit union.

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Ralph and Leslie Klein, former Home Savings customers, say a merger-related glitch caused Washington Mutual to mistakenly reject their monthly government pension check, which the retired couple had been receiving for nearly two years.

"We survive on that money," Ralph Klein said. He said Washington Mutual apologized for the mix-up but refused to advance him the money until the check could be reissued, even though he says he had more than enough money in other accounts to cover the check.

"If this happened at Home Savings or Coast, I don't think I would have had the same problem," Klein said. "I'm looking for a new bank."

Washington Mutual declined to comment on specific problems, but Killinger said employees already are doing a better job of addressing customer concerns now that merger-related distractions are fading.

Balancing those customer needs with the demands of the company's shareholders is likely to be Killinger's toughest job this year.

Whom is Killinger most worried about pleasing?

"Well, the shareholders are the owners of the company," he said. "They are the ones we have to look closely at. But it's in the shareholders' interests that we serve the customers. Like any business, we will have to balance the needs of all our constituents."

Shares of Washington Mutual, which hit an all-time high in March 1998, shortly after the company announced plans to merge with H.F. Ahmanson, have fallen out of favor with investors, who are concerned about the thrift's ability to reap savings through its latest acquisition.